Financial Management Business Skills Content Marketing
Financial Management Business Skills Content Marketing – Recommended form of citation: Langemeier, M. Assessing “Financial Management Skills”. farmdoc daily (8): 224, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, December 7, 2018. Permalink
As farms continue to consolidate, it becomes increasingly important to assess farm management skills. Above a certain company size, it is no longer easy or appropriate for the manager or managers to wear all management hats. How does the management team determine when to focus on professional development, distribute management responsibilities among managers, and seek outside help? This is the second in a series of articles on management skills assessment. The first article was about production management skills (
Financial Management Business Skills Content Marketing
Unit costs and financial performance vary widely between farms. For example, a recent article by Langemeyer and Jaeger (
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August 24, 2018) showed that Kansas Farm Management Association farms had an average operating profit margin ratio of -0.099 and 0.234 in the lower and upper profit margin quartiles between 2008 and 2017, respectively. Unlike farms in the lower quartile, farms in the upper quartile covered operator and family labor and had the cash on hand to expand their operations. Although not discussed in this article, some of the differences in profit margins were due to differences in technical efficiency or the ability to produce a higher level of output for a given level of input. Technical efficiency refers to production benchmarks discussed in the first article of this series (
09/28/2018). In addition to production problems, farms with poor financial performance may use an inappropriate mix of inputs or outputs, or may not be large enough to take advantage of economies of scale.
Table 1 shows important financial management skills. Skills listed include keeping accurate and up-to-date records; Preparation of financial statements and key performance indicators; use of partial budgeting techniques; Profitability tracking at company, field and herd level; optimization of capital purchases; and developing policies related to retained earnings (ie retained earnings within the business) and owner withdrawals. Each farmer should rate their ability in each skill on a scale of 1 to 5, with 1 being relatively weak and 5 being relatively strong in that skill. The idea behind the checklists presented in Table 1 is to assess whether an establishment has a skills gap, which is defined as the difference between the skills an establishment needs and the skills of its current workforce (operators and clerks). Conducting a skills gap analysis helps an organization identify the skills it needs to become more efficient and expand. It can also be an important contributor to recruitment programs, employee development plans or the hiring of outside consultants.
While all of the financial management skills listed in Table 1 are important, we discuss the importance of managing capital purchases, owner withdrawals, and retained earnings. One of the most important metrics to track in an operation is the change in retained earnings. Stock purchases can reduce retained earnings in the short term, but to be profitable they must increase retained earnings over the long term. Owner withdrawals directly affect retained earnings. When the owner’s funds account for a large portion of retained earnings, it becomes difficult for the operation to expand.
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The checklist in Table 1 does not provide the final assessment results, nor does it address competency in the various skill and ability areas that can lead to success. Rather, the checklist helps farms assess their skills and abilities in areas critical to long-term financial success. As farm owners complete the checklist, they should attempt to determine which of the listed skills are most important to improve efficiency and expansion plans.
September 7, 2018) The importance of production benchmarking and financial measures are discussed. This article focuses on the criteria of financial management. The Farmers Financial Standards Board categorizes financial measures using the following breakdowns: liquidity, solvency, profitability, financial efficiency, and ability to repay. At least one measure per category is discussed below.
Commonly used liquidity measures include gross working capital return, working capital per acre, and current ratio. The working capital to total sales marginal levels and the current ratio are 0.35 and 2.0, respectively. If liquidity is below these thresholds, the operation may have difficulty repaying its loans.
Solvency is usually measured using the ratio of debt to assets. How much debt can a farm bear with reasonable certainty? Although this question is too general for a specific answer, some guidance can be given for specific debts where repayment schedules are known. Important factors to consider when determining the amount of debt to be repaid and assessing the amount of debt an operation is happy with are the annual disposable income, the length of the repayment period, the interest rate, the current liquidity and solvency status, income stability and the ability. and the operator’s experience, the operator’s age and health, and the operator’s level of risk aversion. Debt is one of the biggest sources of risk (ie income volatility). Partly for this reason, risk-averse operators naturally tend to have low debt-to-asset ratios.
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Operating profit margin is one of the most important financial metrics. This ratio is calculated by adding the interest expense and subtracting unpaid family and operator labor from the farm’s net income and dividing the result by the farm’s cost of production. Operations in the top quartile for profit margin typically have long-term operating margins of 0.20 or more than 20 percent.
Financial efficiency can be measured using expense ratios and capital turnover ratios. The asset turnover rate measures how efficiently agricultural assets are used to generate agricultural output and is calculated by dividing agricultural output by average total wealth (
April 8, 2016). In terms of profit margin, operations in the top quartile have an asset turnover ratio of at least 0.25 or 25 percent.
September 20, 2018). The Principal Debt Breakdown Margin assesses whether the operation has sufficient revenue to pay the principal debt and interest on the term debt. The replacement margin allows the borrower to assess the operation’s ability to repay debt and replace assets. In the long term, the operation should have a positive replacement margin.
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Management skills assessment is an important part of assessing farm performance and identifying areas for improvement. When operators identify management areas that are not currently being addressed, they should decide whether someone will expedite those areas or seek outside help to address vulnerabilities.
Using Key Performance Indicators is an important part of creating an environment that emphasizes continuous improvement. The right KPIs help an operation measure performance and highlight areas that need more attention. Key indicators of financial performance include power ratio, leverage ratio, operating profit margin ratio, asset turnover ratio, and replacement cost margin.
Disclaimer: We ask all readers, electronic media and others to follow our citation guidelines when publishing articles from farmdoc daily. Instructions are here. The farmdoc daily website is copyright and intellectual property of the University of Illinois. For a detailed explanation, see the University of Illinois Copyright Information and Policies here. A content marketing planning tool that helps marketers come up with ideas for the types of content that will be most engaging for their audience.
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